The world's most populous country—and its second-largest economy—may be the next big market for the world's hedge funds.

China plans to allow foreign hedge funds to set up yuan-denominated products in the People's Republic and to raise capital there, the South China Morning Post reports. The decision, in principle, only, so far, was relayed to the Shanghai Municipal Office of Finance Service.

There will remain major restrictions on what foreign hedge funds can do in China. All will have to be registered in Shanghai, and while they can raise money in the mainland, they will not be permitted to invest in mainland markets.

It is unclear when foreign hedge funds will be able to begin launching Chinese funds.

China already allows foreign firms to set up private equity funds in the country. Those funds have an opposite restriction to that to be imposed on the hedge funds: They must invest exclusively in mainland China.

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